April 13, 2017

The Evolution of Money is reviewed in News Weekly by Colin Teese, former deputy secretary of the Australian Department of Trade:

“Who would have thought of linking money and quantum physics? Well, Orrell and Chlupaty have done just that in The Evolution of Money, perhaps the best book on money I have ever read …

The authors have set themselves the dauntingly difficult task of explaining money, as it were, from the ground up, cutting the cant that has surrounded the subject for centuries. Blending a happy combination of skills and experience, they have recorded a satisfying and entertaining account of how money has impacted, of course, on economics, but no less on politics and society. But that is not the end of it. They make a persuasive case, at least to this reader’s satisfaction, on how the evolution of money has tracked that of science …

A reasonable and benign dictator might demand that those engaged in activities relating to economic management should, as a condition of employment, be compelled to read The Evolution of Money and pass a written examination based on an understanding of its contents.”

April 7, 2015

Review of The Singular Universe and the Reality of Time, by Roberto Unger and Lee Smolin

When the Perimeter Institute—a physics research institute in Waterloo, Ontario—decided several years ago to build an extension, they asked the architects “to provide the optimal environment for the human mind to conceive of the universe.” Clearly the results were effective. One of the founding faculty members, Lee Smolin, and the Harvard philosopher Roberto Mangabeira Unger have conceived of the universe, and have come to a number of conclusions about it, including that a) there is only one of it, and b) time is real, so all things change, mutate and get old.

To non-scientists, these main points, summed up in the book’s title, might seem unremarkable. We only have experience of one universe, so would it not be presumptuous to assert that there are more? Time is clearly real enough (just ask an editor). And Heraclitus pointed out a long time ago that “everything flows.” So how can the authors assert that the admittance of mutability “is astonishing in the reach of its implications”?

The reason for this lofty claim is that, when time is taken seriously, we need to relax the commonly held assumption that the universe is governed by strict mathematical rules based on immutable symmetries. This mathematical version of reality—the product of generations of scientists—is only “a proxy for our world, a counterfeit version of it, a simulacrum.”

Throughout his piece he makes numerous exaggerated, inaccurate, and misleading statements. For example, this academic economist writes that I spend “several chapters discussing the scandalous fact that economists oppose any and all government intervention to protect the environment.” Even if that were my position, which it isn’t, I wouldn’t spend several chapters discussing it (especially since the book only has ten chapters).

Auld quotes me as saying that “senior economists are ‘part of a giant global conspiracy – an attempt to distract us from the real game that is being played behind the scenes.’ (I am not making this up.)” Actually, he is making that up: the full quote is a question, and the answer is negative. He leaves out the question mark.

Auld writes that “I don’t think there’s a single sentence about what economists believe in Economyths with which I agree.” But the book’s assertions are based on or backed by quotes and papers from economists, and the book has been endorsed by leading economists such as White, and Norbert Häring, and Thomas Sedlacek, to name a few.

Compare with e.g. this later one from January 2014 (all comments removed). This seems to be deliberate since all the other posts still have comments. Maybe it’s because Auld in a long exchange in the comments section proves himself utterly incapable of defending his position against a third-year economics student.

In one of those comments Auld accused me of being “full of venom and accusation” towards the “entire community of economists.” He meanwhile maintains a list of “anti-economists” on his site, who are described as vitriolic, spectacularly wrong, technically incompetent, butchering economics, etc. The list includes, besides me, the environmentalist David Suzuki, the economist Steve Keen, and the biologist David Sloan Wilson – all people from outside the mainstream economics establishment who have questioned the basic assumptions of economics.

In another post, Auld provides a list of “18 signs you’re reading bad criticism of economics” which includes everything from “Goes out of its way to point out that the Economics Nobel is not a real Nobel” (ref Nassim Taleb) to “Cites Debunking Economics” (ref Steve Keen). Taleb and Keen, together with White, are among the few people credited with giving advance warning of the financial crisis. Silence those voices, and what hope is there to predict the next one?

December 16, 2013

“Lists 10 crucial assumptions (the economy is simple, fair, stable, etc.) and argues both entertainingly and convincingly that each one is totally at odds with reality. Orrell also suggests that adopting the science of complex systems would radically improve economic policymaking, not least through emphasizing the continuous need to avoid truly bad economic outcomes.” William White, chairman of the Economic Development and Review Committee at the Organization for Economic Cooperation and Development.

Critchley, Ian. “Truth or Beauty: Science and the Quest for Order by David Orrell. How scientists’ search for unity and symmetry may be leading them astray.” The Sunday Times, 20 January 2013.

For centuries, scientists have believed the universe to be rational and ordered, and that the laws governing it must therefore be straightforward. In this fascinating book, the mathematician David Orrell argues that this wish to find cosmic order has been motivated as much by an aesthetic impulse as by a quest for truth. Scientists and mathematicians want the universe to display qualities such as harmony, unity and symmetry. Above all, they desire it to be beautiful. James Watson, one of the biologists who discovered the structure of DNA, was convinced that ‘“the truth, once found, would be simple as well as pretty”.

But the universe has turned out to be much more complex and much less harmonious than scientists hoped. The double helix structure of DNA might be deemed elegant, but it is the “flaws”, or mutations, in DNA that drive evolution. Quantum theory has turned classical notions of the atom on their head. Artists such as the surrealists were quick to embrace the new science, incorporating ideas of uncertainty and spatial distortion into their work. But scientists have long struggled to accept the “unaesthetic” complexity their work has revealed. The search goes on for a single “Theory of Everything”, and Orrell shows that contemporary ideas such as string theory and supersymmetry are the latest in a long line of attempts to uncover universal unity.

This failure of scientists accurately to describe reality might not matter so much if confined to the theoretical, but Orrell shows it has real-life implications that affect us all. Traditional economic models, for example, are based on the assumption that the economy yearns to be stable. The inability of the models to predict and accommodate instabi1ity, he writes, was partly responsible for the current financial crisis. He is scathing about the search for beauty at the expense of practicality and substance: “It is much easier to claim that a theory is beautiful, than to show that it actually works or makes sense.”

Orrell is an engaging and witty writer, adept at explaining often complicated theories in clear language, and never allowing the detail to overwhelm his narrative. If there is one criticism of the book, it is that, surrealists aside, it is frustratingly light on how non-scientists define and interpret aesthetics. Orrell writes in passing about the Zen Buddhist aesthetic of wabi-sabi, which believes beauty to be impermanent and imperfect, and it would have been interesting to have more of such contrasting viewpoints. Nevertheless, he argues persuasively that scientists need to let go of outmoded aesthetic notions and embrace complexity — in other words, they must reflect reality rather than imposing ideas on reality. If they don’t, he says, “we risk seeing the model of the sunset rather than the sunset itself.”

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“Books in brief.” Nature 491, 525, 22 November 2012.

The philosopher Bertrand Russell averred that mathematics has a beauty “sublimely pure, and capable of a stern perfection”. But is science inextricably allied to aesthetic beauty? In applied mathematician David Orrell’s exploration of the Pythagorean quest to realise the cosmos mathematically, the cracks in that paradigm show. Orrell swings from the ancient preoccupation with musical harmony and numerical ratios to Renaissance nature studies, the mechanistic approach and the physical sciences of today. Imperfect as it is, ‘messy’ science, he argues, has a novel beauty of its own.

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Benjamin Eastham. “Review of Truth or Beauty: Science and the Quest for Order by David Orrell.” V&A Magazine, Spring 2013.

The proliferation of popular science programmes on television has accustomed us to bespectacled men talking breathlessly about the beauty of mathematical formulae. Realising that their audience will be overwhelmed by shameful feelings of inadequacy if asked to follow them through any algebraic proof of Einstein’s theory of relativity, these unnervingly jaunty ‘ scientists instead invoke the formula’s epigrammatic elegance as proof of its truth. The implication is that, as Keats said in a letter that echoes the famous line upon which the title of this book plays, “What the imagination seizes as Beauty must be truth”. If you have to take the science behind E=MC2 on trust, you can none the less grasp its beauty.

The mathematician David Orrell here puts forward a compelling argument that this tendency to conﬂate truth with beauty is as much a hindrance as a help to scientific progress. He presents as an illuminating historical example the tortuous amendments made to early models of the solar system in order to describe its operations in terms of perfect circles. It was a source of disappointment to even Johannes Kepler that the planetary orbits should be discovered to trace less pleasing ellipses.

We assume that such delusions of ﬂawless celestial order are confined to a past in which scientific endeavour was geared towards revealing the workings of a rational god. Yet Orrell contends that many physicists continue to allow a faith in the intrinsic orderliness of underlying principles to blind them to empirical evidence to the contrary (a contention contested by the smattering of engineers and scientists I consulted). The ultimate expression of this tendency is the search for a single rule that will rationalise every action of the universe, a Grand Unified Theory that could “fit on the front of a T-shirt”. It is remarkable that, in a society sceptical of grand narratives, the hypothetical ability of physics to formulate a pithy Theory of Everything is tantamount to received wisdom. I found myself worrying, as Orrell took me at walking pace through the paradox of Schrodinger’s cat, at how hubristic we might seem to future generations.

The three properties of beauty which “apply to mathematical formulae and scientific theory as well as they apply to art or architecture” are identified by Orrell as “elegance, unity and symmetry”. It struck me on reading this that the aesthetic principles to which scientists are so devoted would see them banished to the naughty step at any self- respecting art school. This conception of beauty, wedded to principles pre-dating Socrates, might to anyone even loosely familiar with a century’s progress in art, poetry and music seem at best archaic and at worst reactionary.

It is ironic, too, that the artistic insurrections of the last century were in large part conceived to keep step with science. Picasso, Braque, Schoenberg, Dali and Kandinsky are among those to have pioneered revolutionary aesthetics that drew on new ideas of time and space. Writing about that period, Orrell acknowledges that “relativity and quantum physics together were pointing the Way to an alternative conception of beauty … which artists were more willing to take seriously than most scientists”.

Instead, he argues, science continues to play down evidence that contradicts its predilection towards unity and harmony. Among the speculative frameworks to reassert the primacy of those principles is the exceptionally elegant theory of supersymmetry, which posits that every elementary particle possesses an equal and opposite twin, a dark matter doppelganger. The neatness of the idea is seductive, but experimental evidence remains elusive.

This prompts Orrell to question whether cultural factors are responsible for science’s aesthetic conservatism. Such hierarchical, ordered notions of metaphysical beauty might be “a projection of a particular gendered worldview” in a discipline dominated by men, and also bear traces of the military’s close links to research institutions. It is thrilling to question the high-minded objectivity of scientific discourse, and Orrell makes a convincing case for the adoption of new aesthetic principles that acknowledge the self-creative and unpredictable nature of “complex systems” — such as the weather and collective economic behaviour — which stubbornly refuse to adhere to predictions based on rational assumptions.

This rallying call for a new approach — “we need to change our aesthetic, from seeing the world as a machine to seeing it as a lived system” — brought to mind the sculptures of Eva Hesse, the performances of Joseph Beuys and John Dewey’s Art as Experience, which argued (in 1932!) that the “formal conditions of artistic form” are “rooted deep in the world itself”. This engrossing book begins by questioning the assumption that truth and beauty are coextensive, but ends with the more exciting proposal that we must formulate new ideals of beauty if we are to advance in our search for the truths that both scientists and artists pursue.

Due to the nature of science itself, scientific truth is always provisional. And beauty, so the saying goes, is in the eye of the beholder. Given these shifting sands, physicist David Orrell has taken on a tricky subject in his treatise on how aesthetic paradigms have influenced the history and development of science.

In Orrell’s conception, aesthetics describe not just the philosophy of beauty, but any mode of perception motivated by a set of values. He illustrates how one particular aesthetic – characterized by “masculine,” “right-handed” properties such as elegance, harmony, symmetry, integrity, unity, and order – has dominated scientific thinking since the days of Pythagoras, leading to a misconception of the essential nature of the universe. In opposition to this reductionist view, Orrell proposes a “complexity approach,” which involves shifting from a mechanical paradigm to a natural, organic one that values the whole over the parts, context over abstraction, possibility over predictability.

Orrell casts a wide net, both in terms of historical scope and the range of disciplines covered, moving from math and physics to economics and sociology. While such a broad approach may appeal to the general reader, it has the effect of blurring the book’s focus somewhat. Orrell provides a general history of major developments in science that aren’t always strictly on topic. It is only in the book’s final sections that the author addresses his main point, which is that the historically dominant mechanical aesthetic in science is showing itself to be less reliable, and indeed less grounded in the reality of our modern age (his major targets in this respect are string theory and deterministic economic modelling).

Orrell presents a fascinating and mostly coherent account of recent developments in science, though the paradigm shift he proposes may be less radical than it seems. A complexity aesthetic may just be the next step in the natural evolution in scientific thinking, a course adjustment made in order to deal with new fields of scientific inquiry and new evidence provided by emerging technologies. Furthermore, whether a delight in disorder, impermanence, and imperfection will provide us with concepts as productive and “true” as the mechanical models of the past is a question that has yet to be answered.

If it does, we may look back upon Truth or Beauty as an important manifesto for our age. But even if it doesn’t, Orrell has provided an intriguing way of thinking about how we got here.

“Lists 10 crucial assumptions (the economy is simple, fair, stable, etc.) and argues both entertainingly and convincingly that each one is totally at odds with reality. Orrell also suggests that adopting the science of complex systems would radically improve economic policymaking, not least through emphasizing the continuous need to avoid truly bad economic outcomes.” (William White, chairman of the Economic Development and Review Committee at the Organization for Economic Cooperation and Development.)

When I saw this book I was rather excited, because I loved Freakonomics and I rather hoped this was going to be more of the same. It wasn’t. It was so much more. This is without doubt the best book I’ve read this year, and probably one of the most important books I’ve ever read.

In Economyths, David Orrell dramatically demonstrates that neo-classical economics, the basic economics still taught in our universities is absolute rubbish. It has always worried me that winners of the Nobel Prizeish Economics prize (not quite a real Nobel Prize) seemed to contradict each other from year to year. That shouldn’t happen in a science. Yes there will be shifts of direction, but not this random pulling too and fro. Orrell exposes the rotten heart of economics. What we have here is an ideology that pretends to be a science.

What Orrell shows with some humour and powerful analytical precision is how the founders of economics suffered from physics envy. They wanted to be a real science too. So they took the tools of science and applied them – without ever learning the scientific method. One of the fundamentals of the scientific method is that a theory is only good as long as it fits observation. When the data goes adrift of the theory, the theory gets thrown out. Economic theory consistently fails to effectively model the economy, yet the theory isn’t thrown away. Instead the data is cherry-picked, ignoring the bubbles and spikes that are inherently part of the economy, but that the theory can’t cope with.

Orrell shows dramatically how economic theory’s basis on the idea of the market being largely stable, rational and efficient is absolute baloney. Yet this is what every economics undergraduate is taught, and how the pathetically poor models and structures employed by banks and other financial institutions to manage risk work. And guess what? After messing things up, those same models and controls are back in place again.

It’s made clear that not all economists are tied to the neo-classical model. There are some specialists who do know more about dynamic systems and networks and other more appropriate ideas to match what’s really happening, but they seem to be in the minority, and certainly not in control of the economics academic hierarchy.

The book isn’t perfect. It’s rather repetitious on the key points, and I found the chapter on feminist economics less convincing than the rest. It also has an awful cover. But this doesn’t undermine the fact that it’s very readable, takes a truly scientific view of economics and is absolutely essential reading. Forget the subtitle ‘ten ways that economics gets it wrong’ – that’s much too weak.

There are other books taking on economics, but I’ve not come across another that explains it so well for the layperson, takes in the credit crunch, totally destroys the validity of economics as we know it and should be required reading for every politician and banker. No, make that every voter in the land. This ought to be a real game changer of a book. Read it.

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Poole, Steven. “Et cetera.” The Guardian, Saturday 24 July 2010.

A mathematician here joins the burgeoning ranks of writers explaining why standard economic theory has little to do with reality (see also Yves Smith’s recent Econned, and John Quiggin’s forthcoming Zombie Economics). Orrell takes on the efficient market hypothesis (according to which “No one ever gets together to talk about the price of houses or oil or the stockmarket”), equilibrium theory (the assumption of stability), problems of risk modelling (see The Black Swan), and unsustainable assumptions about rationality, fairness, limitless growth, and so forth. His tone is engagingly curious, drawing on biology and psychology, and his historical view spans more than merely the past few decades. Finally Orrell recommends an interdisciplinary approach to a “new economics”, in which ethics and complexity theory might have a say. Perhaps counterproductively, Orrell’s labelling of the old paradigm as “The Neoclassical Logic Piano” makes it sound rather wonderful, and gave me visions of Wittgenstein sitting down and carefully adjusting his stool before beginning to play.

David Orrell is an applied mathematician without formal training in economics. This bothered one reviewer on amazon.com, but it should not have. An outsider can often give us deeper and more objective insights than an insider. We should not forget that Smith and Marx were trained in philosophy, Ricardo was a stockbroker, and von Neumann, a mathematician. We should be thankful that they did not have to endure the horrors of a graduate education in economics, as did this reviewer.

Orrell begins his lively book with a question both obvious and unanswered by mainstream economics. Why did economists not see that the economy was about to implode in 2007? He answers that the fault is in the fundamental assumptions they made. Orrell points to Eugene Fama and his “efficient market theory,” through whose lens, financial markets— and all markets, for that matter—were seen by the most sophisticated neoclassicals. The price of an asset, say a credit default swap, reflects all past, present, and future events that might influence it. That is, it is always “right.” The only deviations from the market price are the result of random, small shocks. Since they are random, they are predictable using the laws of probability and the normal distribution. What this means is that there could have been no housing bubble, no bursting of the bubble, and no Great Recession. A little more than a year ago, Fama told John Cassidy, “I don’t even know what a bubble means.” Indeed! They are ruled out by assumption, the entire chaotic history of capitalism notwithstanding. Fama blamed the government for the crisis, but if markets know all, shouldn’t they have anticipated what the government was going to do and responded in such a way as to mitigate the bad that would happen?

Orrell defines ten “economyths” and devotes a chapter to each one: (1) the economy can be described by economic laws; (2) the economy is made up of independent individuals; (3) the economy is stable; (4) economic risk can be easily managed using statistics; (5) the economy is rational and efficient; (6) the economy is gender-neutral; (7) the economy is fair; (8) economic growth can continue forever; (9) economic growth will make us happy; and (10) economic growth is always good. He explains the historical origin of each myth, often using an amusing story to make his point. He traces Summers’s “one set of laws works everywhere” to Pythagoras’s fascination with the regularity of numbers. Isaac Newton and his physics attracted the original neoclassical economists—William Stanley Jevons, Pareto, and Leon Walras are the ones Orrell discusses, giving a sympathetic account of each. The beautiful symmetry of supply and demand equilibrium derives directly from nineteenth-century physics. Unfortunately, human societies cannot be analyzed using the concepts of physics. They are too messy and complex; power of all kinds is critical to them but has nothing to do with the subject matter of the sciences; and, while the universe is indifferent to happiness, human beings are not.

Orrell suggests that economics has much to learn from modern discoveries in both the natural and social sciences. Although economies are complex systems and therefore not amenable to one-dimensional theories that aim to explain everything, it is possible to find “pockets of predictability.” If we cannot know when an economic crisis will occur or how deep it will be, we can perhaps predict that when we deregulate our banks, we will have problems. Our economies have much in common with networks, like electrical grids, and we can prevent a breakdown in one part of the grid from spreading and causing catastrophe by taking simple steps, such as insulating one part from another. One example would be to maintain a separation between commercial and investment banking. Another would be to have a backup plan, such as forcing financial entities to keep larger money reserves on hand at all times. In mainstream economics, more production is always good because we assume it will make us happier. However, sociologists, psychologists, medical researchers, and ecologists have found that more consumption and more possessions do not make us happier; that the negative consequences of growing inequality can outweigh any positive results of increasing output; that economic growth is destroying the planet. Economists ignore such research at their peril.

Let me end this review with some mild critical comments. None of these books tells us how to break the vice-like grip of neoclassical economics on both the profession and on most of the institutions of capitalist society. If almost all of it is grossly apologetic for the human misery and environmental degradation that form the body and soul of capitalism, how does it tick on, like the Energizer Bunny, despite the Great Recession that seemed to offer some hope that we would reject it once and for all? When the world’s financial markets were on the verge of a catastrophic breakdown, Alan Greenspan, the “maestro” of the markets, offered mea culpas at a Congressional hearing for adhering to an incorrect theory. Now he has recanted his apostasy. Everything was really all right, just as he had said before the bubble burst.

Modern Political Economics sings the praises of Karl Marx for uncovering the source of profits in the exploitation of wage labor. Marx showed that human labor is not reducible to an ordinary commodity; workers rebel against their exploitation. However, the authors fail to develop this idea (and neither Adler nor Orrell talk about worker organizing at all). Instead, they devote too many words about how Marx succumbed to the “inherent error,” of using the labor theory of value to explain relative prices, giving rise to the infamous “transformation problem.” They imply that Marx’s failure here is one reason why his truths about profits and labor have been lost. This is much too simple. Marx’s truths have been lost because the class struggle waged by the working class has not succeeded in effectively challenging the rule of capital. Neoclassical economics is the economics of capital, as Marx’s political economy is that of the working class. As long as capital rules without a radical presence fighting against it, neoclassical economics will rule as well. No such presence exists today in any rich capitalist country, or, with a handful of exceptions, in any poor nation, either.

All three of these books are useful. Orrell makes sound recommendations that economists utilize methods of analysis and techniques that have proven their worth in other fields of study. His ten economic myths should be committed to memory. Adler has done a marvelous job of showing us, especially students, that neoclassical economics is strong on assertions but weak on supporting evidence. Varoufakis, Halevi, and Theocaratis have blown neoclassical economics to bits. However, stating the obvious stupidities and shortcomings of neoclassical economics will do nothing to weaken its hold. Unless, that is, a significant number of students and economists ally themselves with working men and women: teaching them, writing for and with them, becoming one of them in their own workplaces.

Few economists predicted the “great recession” of 2008-2010; most were as shocked and confused as anyone else. As David Orrell reminds us in Economyths: Ten Ways That Economics Gets It Wrong, the former Chairman of the Federal Reserve Board in the USA, Alan Greenspan (an Economist by professional training), declared in October 2008 that “the whole intellectual edifice” by which he and many other leading American economists had long understood the economic events of the world had “collapsed.” As he added, “those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity (myself especially) are in a state of shocked disbelief.”

The “intellectual edifice” to which Greenspan referred was not a recent development within economics. Indeed, it dated at least back to Adam Smith and the “invisible hand.” For reasons that Greenspan acknowledged he now found difficult to comprehend, the invisible hand had recently failed in the most spectacular fashion since the 1930s.

The 1930s depression precipitated an intellectual crisis within economics that was only resolved by John Maynard Keynes with the publication in 1936 of The General Theory (the title suggesting – Keynes was not known for his modesty – that it was the equivalent for economics of Einstein’s general theory of relativity for physics). Keynes’s solution was to concede the failure of the invisible hand as far as unemployment, inflation and other macroeconomic variables and thereby open the way for government “scientific management” of aggregate economic outcomes. Keynes, however, left the edifice of micro-economics largely standing. The workings of supply and demand – not greatly changed from Adam Smith’s vision of them – could still be relied upon to determine the socially appropriate levels of production and consumption in specific markets.

The events of 2008-2010, however, challenged the authority of micro-economics as well. Over large parts of the American economy, individuals pursuing their own interests had yielded a potentially catastrophic outcome in market sectors, such as housing finance and banking. Only massive government intervention had averted a total disaster for the national economy. Either the cumulative results of individual self-interest no longer served the social welfare (the invisible hand no longer worked, at least in these critical market sectors) or, equally challenging for mainstream economic thinking, large numbers of leading economic actors had grossly misperceived their own true interest, and to great social detriment.

At a 2011 Washington conference sponsored by the International Monetary Fund, a panel of leading economists thus heard “a fitting eulogy for the economic orthodoxy that once governed the world”, as a reporter for the Washington Post described the scene. The eulogy was delivered by Olivier Blanchard, a current Professor and former Chairman of the Economics Department at MIT, among the most prestigious departments in the world. Blanchard told the panel that until the recent crisis, the mainstream of the profession “had converged on a beautiful construction” to explain the workings of markets but now had to face the fact that “beauty is not synonymous with truth.” As the Washington Post related, Blanchard conceded that “the list of discredited [economic] theories is now long.” Heightening the intellectual crisis now facing the economics profession, it was not clear “whether a new consensus can be salvaged out of the ashes of the old.”

In Economyths: Ten Ways That Economics Gets It Wrong, Orrell hopes to lead us out of this economic wilderness. Given such an ambitious goal, it is not surprising that he falls well short. Orrell does, however, do a good job of developing one central message for any rethinking of the future of economics. According to Economyths: Ten Ways That Economics Gets It Wrong, the standard “neo-classical” model, dominating mainstream microeconomic thinking for more than 100 years, is fundamentally flawed and must be abandoned. While this is hardly a new idea, it still bears frequent repetition.

Orrell writes of professional economists that they are “physics groupies.” The neo-classical model was first developed by Stanley Jevons, Leon Walras and other economists of the second half of the nineteenth century. It presented in full mathematical dress the verbal theories of Adam Smith. The goal was to give economics the same scientific status, and the same social prestige, of physics.

The founders of neo-classical economics were convinced, Orrell writes:

[…] that they needed only to make a simple substitution between physical and economic quantities. In place of atoms, there were individuals or firms, and in place of energy there was [the pursuit of] utility in all its different forms.

As Jevons asserted, it would thereby be possible for economic theory to achieve “a kind of physical astronomy [of the economic world] investigating the mutual perturbations of individuals” in the same manner that Newton investigated the interactions of the sun and the planets in the solar system.

Economics is more complicated than physics, however, more like the weather than the solar system. In order to make the economic theory tractable for the mathematical methods of physics, some very strong assumptions were necessary. Most importantly, economic actors had to be perfectly informed and perfectly rational about everything relevant to their economic decisions – however, altogether implausible this might be. In their desire to emulate physics, Orrell writes, economists:

[…] were really just grabbing ideas from the air and transplanting them into economics without any concern for basic principles, such as [the actual lack of appropriate] units of measurement or the fact that people are not [fully rational calculating] machines.

In developing a theory of the pursuit of maximum utility “as an analogy for energy” in physics, economists ended up with such a high degree of abstraction that the results were of “little use” for understanding most real economic phenomena.

Indeed, neo-classical economics was virtually a tautology – involving a “circular logic,” as Orrell writes. The fundamental problem faced by any economic system is one of the discovery and utilization of information in an efficient and well-coordinated way. What types of products will consumers actually demand, what are the best methods of production, what are the lowest cost forms of transportation, what new and better technologies are on the horizon, etc. In a market system, the discovery and use of such information – which must itself be constantly reevaluated for its accuracy – is then driven by a large-scale and highly decentralized process of constant private trial and error.

Rather than perfect information, it thus might be more appropriate to assume a starting point of perfect ignorance. By assuming, instead that the information problem was already solved (by making the beginning assumption of perfect information possessed by all economic actors), neo-classical economics in effect assumed its central conclusion – that markets create and use information in an economically optimal fashion. If everyone is perfectly informed and calculates rationally, there is no economic problem left to be solved.

Orrell has studied economics closely, but is trained as a mathematician (he has a PhD from Oxford). When a real mathematician or physicist looks at the supposedly scientific explanations of neo-classical economics, much like Orrell, they are often appalled. As we are reminded in Economyths: Ten Ways That Economics Gets It Wrong, the leading American mathematician Norbert Wiener once wrote that:

[…] economists have developed the habit of dressing up their rather imprecise ideas in the language of the infinitesimal calculus […] To assign what purports to be precise values to such essentially vague quantities is neither useful nor honest, and any pretense of applying formulae to these loosely defined quantities is a sham and a waste of time.

Neo-classical economics at its abstract mathematical levels is thus a scientific failure if not an outright fraud. How, then, could it have played such a large part in the thinking of the mainstream economics profession for a century or more, and exerted such a large influence on public policy – at least until the recent economic crisis exposed in such graphic terms its inadequacies?

Orrell offers several explanations. First, neo-classical economics offered a picture of a perfectly rational world – as Blanchard observed to the IMF panel, its vision appeared “beautiful” to many economists, in sharp contrast to the ugliness of real-world events in all their rough and tumble disorder. Modern economists are the most recent heirs, Orrell finds, to an important tradition in Western civilization that traces all the way back to the ancient Greeks. The followers of Pythagoras were a “pseudo-religious cult” who held the belief “that number was the basis for the structure of the universe, and gave each number a special, almost magical significance.”

Plato was borrowing directly from the Pythagoreans when he taught that the abstract forms are the ultimate realities and the events of the world mere imperfect copies. The highest and most important of the forms, moreover, are mathematical – specifically for Plato, they are geometrical. The gods have created the world according to a rational mathematical model, as Platonists have now claimed for more than two millennia – and with neo-classical economists a particularly important recent claimant. The modern assumption is that progress is occurring in all areas of society; but as neo-classical economics illustrates, we have not always advanced much beyond the ancient Greeks.

Platonic ideas were the leading Greek influence in shaping Christian theology until the thirteenth century when Thomas Aquinas turned instead to Aristotle. The Aristotelian orthodoxies prevailed until the Protestant Reformation and the scientific revolution. Then, as Kepler, Galileo, Newton and many other practitioners of the scientific method revealed with astonishing success, Plato had actually been correct; the world – or at least the natural world – did follow strictly according to mathematical forms.

In Christian theology, “the creation” is studied to reveal the mind of God. In the Bible, Paul wrote in Romans 1:20 that “ever since the creation of the world His [God’s] invisible nature, namely, His eternal power and deity, has been clearly perceived in the things that have been made,” as human beings encounter them in the natural world. As modern science has discovered, God apparently holds mathematical ideas in especially high regard – if not, why would he have made all of the natural order to follow strictly according to mathematical rules. Paul’s epistles must now apparently be revised; in many important domains of human experience, God speaks most truthfully to the faithful in the language of mathematics.

Hence, when neo-classical economists portrayed the economic world of markets as governed by mathematical laws, as Economyths: Ten Ways That Economics Gets It Wrong explains, “the market […] was granted a semi-divine status.” It was a very old story: the Pythagorean “cult” had similarly regarded numbers as semi-divine. The neo-classical model was eventually developed at the highest level of mathematical sophistication by Kenneth Arrow and Gerard Debreu (winners of the Nobel prize in economics in 1972 and 1983, respectively, in part for this accomplishment). Orrell writes that “the Arrow-Debreu model didn’t represent an economy of human beings – it was an economy of gods.” As Orrell further comments, in looking to the efficiency of market processes, “mainstream economists, along with most politicians and media, are almost religiously in favour of economic growth.” In short, depicting the market in strictly mathematical terms may have failed as a matter of a valid scientific understanding of real-world economic events; as a declaration of theology, however, it was a great success that followed in a long Western tradition dating to Plato (Nelson, 2001).

The religious authority upholding neo-classical ideas, moreover, made them all the more powerful in society – and thus practically useful to those who could command the services of the economic priesthood. This is the third reason given by Orrell for the large influence and longevity of neo-classical economics. As Economyths: Ten Ways That Economics Gets It Wrong informs us:

[…] the ruling elite always has a very good argument as to why it should be in charge and have most of the wealth. […] Today, that argument goes by names such as the invisible hand, the efficient market, or mainstream economics,

best seen as theological statements all.

The large benefits of private markets have been known for thousands of years. Aristotle wrote that property rights avoid indefinite squabbling and fighting over the use of resources. As a useful means of trading among the holders of such rights, a market system with money and prices will rather obviously be superior to simple barter. But, full social legitimacy in a society does not derive strictly from such practical usefulness. An economic system blessed by a powerful divinity will have greater staying power. Neo-classical economics is the latest of these divinities. In portraying a market system governed by mathematical laws – recognized as a main language of God since the scientific revolution – this religious blessing served to ward off Marxist, socialist, Islamist, and many other assaults on the market.

A religious defense of the market, moreover, can itself be practically useful in a non-religious way. Orrell himself acknowledges the desirability of a market system, declaring that “free markets have many splendid attributes, which must be protected. They are the best way that we have come up with to make a wide variety of economic decisions.” Real markets, however, are turbulent, creating big losers as well as many winners – a process of “creative destruction,” as Joseph Schumpeter wrote. Markets may seem unethical or even morally bankrupt – “un- Christian” – in their defense of the private pursuit of self-interest. There have been few times when markets have not been under strong challenge. Orrell fails to mention the practically useful role played by neo-classical economic religion in defending the market – presenting it as one more reflection of God’s mathematical intent for the world.

Economists, in short, are not scientists but, understood more accurately, the high priests of modern society. Like other priesthoods, they have their own religious rituals, symbols and forms of blessing, the pseudo-scientific “artwork” of neo-classical economics among the most influential. Also like many other priesthoods, economists speak to each other in a language impenetrable to the average person – now mathematics instead of the Latin of old. The mathematical inscrutability of economic writings not only insulates them from popular comprehension and criticism but gives them a magical aura – as Orrell observes, somewhat in the manner of the Delphic oracles of ancient Greece.

If neo-classical economics is to be abandoned, it will probably not be for a scientific reason because its religious authority has faded. Environmentalism is perhaps the strongest contemporary religious challenger to the economic mainstream (Nelson, 2010). To the great surprising of many modern observers, older forms of religious belief, such as Christian fundamentalism and Pentacostalism, as well as Islamic and other forms of non-Christian fundamentalism, have also been staging a comeback.

While Orrell does mention the religious roles played by neo-classical economics, he does not explore this aspect adequately. Economyths: Ten Ways That Economics Gets It Wrong has other important omissions. Orrell gives little attention to the rise of “institutional economics” since the 1970s, a new economic school which in fact makes many of the same criticisms of neo-classical economics that he makes. The institutional school has already produced a number of Nobel Prize winners in economics such as Ronald Coase, Oliver Williamson, Douglass North, George Akerlof, Michael Spence, Joseph Stiglitz, and Elinor Ostrom. Orrell is correct, however, that neo-classical economics continued as the dominant economic voice in the policy making arena into the twenty-first century. But, there were rapidly growing numbers of economic heretics, converting many of their fellow economists, even if the policy significance of the institutional school to date has been limited (perhaps because, in the end, one religion can only be replaced by another religion).

Economyths: Ten Ways That Economics Gets It Wrong also includes extended discussions of more specific topics, such as the role of women in society, the true sources of human happiness, and environmental policy. Orrell has little new to say in these areas; his treatment is less analytical and more a matter of simple assertion. In the USA, he would fit well within the progressive wing of the contemporary Democratic Party. His arguments would probably be persuasive to many fellow progressives, but less so to others who do not have the same starting point.

On the whole, though, I recommend Economyths: Ten Ways That Economics Gets It Wrong. Whatever its omissions and other failings, much of the book is devoted to making a strong case for one very important finding – the intellectual poverty of neo-classical economics. Economyths: Ten Ways That Economics Gets It Wrong is also consistently interesting and enjoyable reading – no mean feat for a treatise on economics. A wide audience including many non-economists could benefit from reading it.

References:

Nelson, R.H. (2001), Economics as Religion: From Samuelson to Chicago and Beyond, Penn State University Press, University Park, PA.

Hulaimi, Wan A. “Economics and the pursuit of happiness.” New Straits Times (Malaysia), 11 December 2011.

THE basic assumption of neoclassical economics is so simple as to be touching: that the market is driven towards stablity and men are inherently good. There is symmetry in this, and an invisible hand that guides us all, our lives and baggage, towards equilibrium.

Although economists like to describe their field of work as a science, I have always admired them for their metaphysics, until I read David Orrell, who reminds us that neoclassical economics is based on an explicit comparison with Newtonian physics.

Well, here is how he sees it in his book Economyths which I urge you all to read. We are all unconnected individuals, like particles, who interact with each other but are otherwise unchanged. In other words, we exchange goods and barter and trade, but beyond that we remain untouched. To economists who are neoclassically bent there’s more to this than that, of course. In the field where they — we — exist there is a guiding force towards equilibrium, and the market is so driven by rationality that extreme free marketeers would sniff at the absurdity of restraint as the mad eschew the straitjacket.

You’ll forgive me that last remark for indeed my slip is beginning to show, but let’s examine the above in broad daylight.

We have indeed been cut up, sliced and atomised. That is a glaring fact in advanced countries as it is in parts that are developing very well, thank you very much. Individuals are surging way above crowds, and me-ism is taking precedence over us, more so in economics than in other pursuits, though nothing has been untouched. But to say that we are as indifferent to each other, or unswayed by the movements of crowds as atoms are unchanged by other atoms even when they are in close proximity and bumping into one another in the market place is patently absurd. How then do you explain the madness of crowds?

Orrell is a mathematician, so he looks from the perspective of a non-economist. This strengthens his observations because as it so often happens, people who makejudgments about things that are before their eyes forget to examine the ground they are standing on.

Orthodox economists — neoclassical economists as Orrell calls them — are uncomfortable with this and much of their riposte have missed the obvious points that Orrel has raised. The fact is there are other people, too, and many of them are economists, who have taken up this path of heterodoxy simply because economics as presently espoused by neoclassists simply doesn’t work. Look at the inequalities in society, look at the widening gap between the rich and poor, look at the distortions in the market, how the big banks are guzzling away the wealth of nations. How can we say to the ordinary folk demonstrating in the streets that the market will adjust itself, equlibrium will prevail and come nightfall the hidden hand will tuck us all safely in bed?

“If we are to base our quest for the good life on empirical facts, rather than corny 19th-century ideas, then we need to rebalance our priorities,” Orrell says.

Money and happiness are not the same thing. This is a fact worthy of note by people who invest say our zakat fund, into office blocks andplantations, not hospitals for the poor or social housing for working folk. Look, says Orrell, pointing at the rising GDP in Western economies over the last few decades. Look closely there and you’ll see that reported happiness levels have remained relatively static. Why? Because money and happiness are not the same thing.

For all that he says, Orrell is remarkably coy about the road to take now that neoclassists have worked up all this mess. His concerns as a mathematician are the flaws in the economic models and their methods of prediction. But occasionally he comes up with a gem: he says that it only makes sense when you stop looking at economics as a scientific theory “but as an encoding of a particular story or ideology about money and society”.

Perhaps that is the only way heterodoxy can make its voices heard. It reminds me of a friend who once interviewed Galbraith (a voice of heterodoxy from the not too distant past) and asked him about the origins of the Federal Reserve. Galbraith only paused to give him a fixed look, but he swore that beneath the little table where he was writing into his notebook the long Galbraithian hand was giving his knee a squeeze.

There is denial of course that preserves many parts intact. In Beyond Growth, ecological economist Herman Daly tells of his time working on a World Bank Development and the Environment report in 1992. His suggestion to include the ‘Environment’ into a chart was dropped.

“It is as if economics has become so disembodied and detached from reality that it thinks it can do without the physical world,” Orrell observes. And Orrell says this too: bubbles will pop and sub-primes come and go, but nobody asked you to bet on them, and that’s the issue.

For a discussion of negative reviews from some economists, see World Finance article on book-burning economists here.

For a response to the review by Chris Auld in particular, see here. However the best response is a series of comments from Cahal Moran of the Post-Crash Economics Society on the original post. Comments were removed from later versions, but they can still be read in the archived version.